Heineken reported a 1Q22 core net profit of RM113.4m (+18% QoQ, +54% YoY) which came in above both our and consensus projections at 38% and 41%, respectively. The discrepancies in our forecast was due to higher-than-expected revenue and lower-than-expected operating costs. We raise our earnings forecasts for FY22-23f by 8-16% as we lift revenue estimates and lower cost assumptions. Subsequently, our TP is raised to RM28.87 (from RM24.92), implying a PE multiple of 25.4x (at 5-year historical mean) on its FY22f EPS of 113.7sen. Reiterate our BUY rating on Heineken.

Starting strong. Heineken’s 1Q22 core net profit of RM113.4m (+18% QoQ, +54% YoY) came in above both our and consensus projections at 38% and 41%, respectively. The discrepancies in our forecast was due to higher-than-expected revenue and lower-than-expected operating costs.

Dividend. None Declared (1Q21: None).

QoQ. While revenue remained rather flat QoQ (+1%), core net profit registered an 18% growth owing to margin expansion. Improvement in EBIT margin (+4.2ppts) was predominantly due to the group’s continuous focus in cost optimisation. In our view, the price adjustment in 4Q21 also contributed to the better margin as the price increase only took effect on 1st November 2021, hence 1Q22 reflected a full 3-month boost of the price hikes.

YoY. Revenue growth of 27% was a result of Heineken’s effective commercial execution during the Chinese New Year festive, coupled with the easing of pandemic restrictions. Price adjustments carried out in 4Q21 also contributed to the better revenue. Despite rising cost pessure, EBIT margin expanded by 4.5ppts, owing to Heineken’s effective cost rationalisation initiatives and price hikes. Consequently, core net profit reported a 54% growth.

Outlook. Following Malaysia’s transition into an endemic phase, we opine that brewers like Heineken will benefit from the removal of certain Covid-19 restrictions, due to (i) longer operating hours for eateries and entertainment outlets (i.e. past midnight); (ii) more mass gatherings, events and weddings; (iii) larger turnout for events; as well as (iii) higher tourist arrivals. In our view, the reopening of nightclubs starting 15th May would also augur well for Heineken, supported by the expected increase in beer consumption. We are not overly concerned on the rising input costs (higher barley and aluminium prices), as we believe that the brewers will have the ability to raise prices if required, considering the relatively inelastic demand for beer. Better operating leverage (due to the absence of forced brewery closures) and “premiumisation push” should also help to protect any margin erosion arising from cost inflation.

Forecast. We adjust our FY22-23f earnings projections upwards by 8-16% as we raise revenue forecast and lower cost assumptions based on the discrepancies mentioned above. We also introduce of FY24f earnings of RM369.1m.

Maintain BUY, TP: RM28.87. Our TP is raised to RM28.87 (from RM24.92), implying a PE multiple of 25.4x (at 5-year historical mean) on its FY22f EPS of 113.7sen. Reiterate our BUY rating on Heineken.

Source: Hong Leong Investment Bank Research - 12 May 2022